Highlights from COP27: What CPAs need to keep an eye on
Organizations should already be thinking about their climate risk and related business, operational and financial implications (Getty Images/Cecilie Arcurs)
This year’s 27th UN Climate Change Conference (COP27) in Sharm El Sheikh, Egypt addressed a wide range of financial and societal barriers impacting climate change action globally. Whereas COP26 was focused on identifying issues and formalizing commitments, this year’s discussions revolved around planning initiatives.
“The focus at this COP was on action,” says Rosemary McGuire, CPA, vice-president, research, guidance and support at CPA Canada. “This year’s summit really illustrated just how much more needs to be done by players in the public and private sectors.”
Here are some highlights that CPAs need to keep on their radar.
CLIMATE ACTION GOALS ARE FALLING BEHIND
A key concern was that countries have been lagging on their goals. The COP27 report indicates that 1.5°C scenario is not attainable on the current trajectory, citing a need for more ambitious action.
“The challenge remains that a lot of countries are not in the same place we are,” says David-Alexandre Brassard, chief economist, CPA Canada. “Economic growth is typically accompanied by rising emissions until countries are positioned to have a strong enough service sector to decouple them. Also, the current conflict in Ukraine and the ensuing vulnerability of Europe on the energy front is adding complications to global environmental efforts.”
THE CLIMATE FINANCE GAP CONTINUES TO LOOM LARGE
Criticisms continue that private capital is not being mobilized quickly enough, says McGuire. “On the other hand, carbon credits are playing a significant role in climate financing particularly for developing countries.”
COP27 saw the U.S. unveil a new public-private global carbon credit trading initiative launched in conjunction with the Rockefeller Foundation and the Bezos Earth Fund called the Energy Transition Accelerator. The initiative is focused on generating private sector funding through voluntary carbon credits and deliver investment in renewable energy to support the energy transition in developing countries that often struggle to secure project funding.
In addition, COP27 announced a historic loss and damage funding agreement to address the need for rich developed countries, which are the largest emitters, to pay poorer countries for damages associated with climate change. The group committed to establishing a financial support structure for the most vulnerable at COP28 in 2023.
“Loss and damage funding is a key element in efforts to built trust with nations suffering the biggest climate change issues,” says Brassard.
STANDARDIZATION IS CRITICAL TO MOVING FORWARD
This year, the International Sustainability Standards Board (ISSB) moved forward on the delivery of the architecture needed to support development of a global baseline for sustainability disclosure standards. It also announced next steps in its partnership framework designed to support more than 30 partner organizations preparing to use International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards.
“Greater accountability and transparency around climate exposures and commitments continued to be a key theme at COP 27 and the ISSB is an integral part of that,” says McGuire. “The ISSB is moving quickly and has made significant progress since COP26.”
She adds that CPA Canada will be closely monitoring commitments to adopt the IFRS Sustainability Disclosure Standards once initial standards are published in 2023. Progress is also being made in establishing a Canadian Sustainability Standards Board which will work in lock-step with the ISSB, ensuring that the Canadian perspective is part of international decision making.
“Widespread adoption of these standards will go a long way to providing the global baseline of information that investors need to inform their investment decisions. Greater standardization around what a net-zero commitment should look like will be welcome. We will also be watching what the ISSB prioritizes as part of its future work agenda—biodiversity and water are high on the list of sustainability disclosure topics that require increased attention.”
GREATER ACCOUNTABILITY OVER NET-ZERO TARGETS A MUST
The report developed by the UN’s High-level Expert Group on the Net-zero Emissions Commitments of Non-State Entities, outlined how concerns about integrity of net-zero pledges led to key recommendations that net-zero targets need to be regulated.
The report states: “To effectively tackle greenwashing and ensure a level playing field, non state actors need to move from voluntary initiatives to regulated requirements for net zero…. Many large non-state actors—especially privately held companies and state-owned enterprises—have not yet made net-zero commitments which raises competitiveness concerns.”
“Any entity that has made or thinking about making a net-zero commitment needs to pay attention,” says McGuire. “However, it is still not clear how HLEG recommendations will interact with current sustainability reporting developments.”
NEW PROGRAM WILL FOCUS ON HIGH EMISSION SECTORS
This year also saw the launch of the Mitigation Work Program, outlining a plan to accelerate the decarbonization of five sectors—power, road transport, steel, hydrogen and agriculture.
“Sustainable agriculture was a key focus as it is responsible for a large area of emissions,” says McGuire. “That is especially significant for Canada, so will continue to garner attention, including at the upcoming COP15 Biodiversity Summit in Montreal.”
“This will play into reporting on the emissions front,” adds Brassard. “Governments and companies need accurate emission reporting. CPAs can expect reporting requirements to become more widespread. “
WHERE WILL IT GO FROM HERE?
“What we saw this year was the beginning of the implementation of a plan,” says Brassard. “This time participants were starting to walk the talk. The overarching questions were: Are they doing it fast enough and is there enough money to execute on the commitments brought forth at COP26?”
“What we have seen is an increasing recognition of the interconnection between all the different systems,” says McGuire. “For example, you can’t address climate change without thinking about nature-based solutions and impact on people and communities. You can’t expect to shift capital into low-carbon investments without clear criteria on what that means and without good, reliable data. We have to revisit our definition of ‘climate action’ and our approach to it in many respects.”
McGuire advises organizations to start their journey now. “Entities should not wait for regulation to start thinking about what all these changes mean for their organizations. They should be educating themselves and assessing the organization’s climate risk and related business, operational and financial implications.”
ACCOUNTING AND CLIMATE CHANGE
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